What Is a Payroll Tax Expense?

A payroll-tax expense is a tax paid on payroll, either by the employer or the employee. Payroll-tax expenses add a significant amount to employer payroll beyond simple employee pay, and also usually deduct from the employee's final paycheck.

Federal Payroll-Tax Expenses

Unless otherwise indicated by their filing status, all paid employees incur payroll-tax liabilities for federal income tax, Medicare tax, and Social Security tax. These amounts fluctuate based on an employee's tax history and filing status.

State Payroll-Tax Expenses

Most states levy an income tax on all employees working within their state boundaries (again, unless otherwise indicated by their filing status). State income taxes are generally much lower than federal income taxes.

Local Payroll-Tax Expenses

Some local authorities, like counties and cities, also charge income taxes on all payroll created within their boundaries.

Employer Payroll-Tax Expenses

Employers are usually subject to additional payroll-tax expenses, like unemployment-tax insurance on the federal and state levels. These tax burdens are usually shared with the employees.

How Payroll Tax Expenses Are Calculated

All income taxes are calculated based on gross wages multiplied by the set tax rate, as established by the taxing organization and a taxpayer's filing status. Unemployment-insurance tax rates are calculated based on the number of a company's former employees filing for unemployment insurance benefits.